Investment Highlights

• Maintain HOLD on Sime Darby with an unchanged RNAV-based fair value of RM8.40/share. Sime is currently trading at FY17F PE of 30.2x and FY18F PE of 27.6x.

• Sime is expected to issue the prospectus on the listing of its plantation and property units in November 2017. The EGM for the listing exercise is anticipated to take place in November 2017. The listings are envisaged to be in December 2017.

• Sime's KPI is to achieve a net profit of RM2.2bil in FY17F inclusive of exceptional gains. Sime has reported a net profit of RM1.79bil in 9MFY17. Excluding exceptional gains, we estimate Sime's core net profit at RM1.3bil in 9MFY17.

• Sime's exceptional items amounted to RM456mil in 9MFY17. These related mainly to gains of RM202mil on the disposal of 403 acres of land in Glengowrie Estate, Semenyih and RM131mil on the disposal of Sime Darby Property (Alexandria). We understand that there will be more gains on disposal of land in 4QFY17.

• Sime's 9MFY17 core net profit was in line with our forecast but below consensus estimates. Sime's share of net profits in the Battersea property development project amounted to RM95mil in 9MFY17. Battersea's contribution declined from RM87mil in 2QFY17 to zero in 3QFY17. Earnings contribution from Battersea will resume in 4QFY17.

• Sime was hit by weak earnings from the industrial and property units in 9MFY17. EBIT of industrial unit fell by 14.3% YoY to RM180mil in 9MFY17 due to lower engine deliveries to the oil and gas sector in Singapore while property was affected by provision for unsold stocks of RM79mil and expenses for the termination of the Saizen REIT corporate exercise of RM39mil.

• On a positive note, its upstream plantation division recorded a 263.2% YoY climb in EBIT from RM389mil in 9MFY16 to RM1.4bil in 9MFY17. Average realised CPO price expanded by 35.4% from RM2,113/tonne in 9MFY16 to RM2,861/tonne in 9MFY17. This more than compensated for a 2.4% YoY fall in FFB production in 9MFY17.

• On a quarterly basis, FFB output fell by 9.6% QoQ in 3QFY17. Average realised CPO price climbed by 8.9% from RM2,835/tonne in 2QFY17 to RM3,088/tonne in 3QFY17.

• Net gearing (including perpetual sukuk) edged down from 36.7% as at end-December 2016 to 35.6% as at end-March 2017. Gross borrowings (including perpetual sukuk) slid from RM17.4bil as at end-December 2016 to RM17.2bil as at end-March 2017. We expect Sime's borrowings to decline going forward as Sime has completed restructuring its US$800mil sukuk bonds. The group has repurchased 91% of the sukuk bonds.

Source: AmInvest Research - 1 Jun 2017